AUD Under Pressure as Rate Hike Bets Clash with Strengthening US Dollar

The Australian Dollar retreats for a sixth consecutive session, caught between growing expectations of an RBA rate hike as early as February and a resurgent US Dollar driven by fading Federal Reserve easing prospects. The Australian Dollar faces headwinds on Thursday despite fresh inflation data that typically supports rate-hiking scenarios. Markets are now grappling with conflicting signals: while the Reserve Bank of Australia appears increasingly hawkish, the dynamics between USD to Australian Dollar exchange rates remain decidedly in favor of the greenback.

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%, signaling persistent price pressures that align with the RBA’s more aggressive monetary policy stance. Major financial institutions, including Commonwealth Bank of Australia and National Australia Bank, have shifted their forecasts to reflect an earlier tightening cycle than previously anticipated. Swap markets are currently pricing in a 28% probability of a February rate hike, with probabilities rising to nearly 41% for March and August seen as almost fully priced for action.

Why the US Dollar Keeps Gaining Ground

The strength of the USD to Australian Dollar ratio reflects broader dynamics in the Federal Reserve’s rate outlook. The US Dollar Index, tracking the greenback against six major currencies, remains firm near 98.40 as market participants reassess the likelihood of additional Fed rate cuts. Recent US employment data painted a mixed picture: November payrolls grew 64K (slightly above expectations), yet October figures were sharply revised downward, and unemployment ticked up to 4.6%, the highest since 2021.

Atlanta Fed President Raphael Bostic recently emphasized that while labor market conditions are cooling gradually, price pressures remain entrenched across the economy. He cautioned against premature declarations of victory over inflation, pointing to “multiple surveys” showing elevated input costs and firm-level pricing decisions aimed at preserving margins. With Fed officials split on the need for further easing, CME FedWatch data now shows a 74.4% probability of unchanged rates at January’s meeting, up from 70% a week prior. This recalibration supports sustained demand for the US Dollar.

Australian Economic Data Points to Persistence

Australia’s economic backdrop offers limited support for the Aussie. The December manufacturing PMI inched up to 52.2 from 51.6, yet the services sector softened to 51.0 from 52.8, pulling the composite reading down to 51.1. Employment figures from November also disappointed: the unemployment rate held steady at 4.3%, but employment declined by 21.3K (revised from a gain of 42.2K in October), underscoring labor market fragility.

Meanwhile, China’s economic momentum is slowing. November retail sales rose just 1.3% year-over-year, well below the 2.9% forecast, while industrial production climbed 4.8% versus a 5.0% expectation. Fixed asset investment deteriorated further, posting -2.6% year-to-date, missing the -2.3% consensus.

Technical Picture: AUD/USD Tests Major Support

The AUD/USD pair has broken below the 0.6600 confluence zone, currently trading below its nine-day exponential moving average and outside its ascending channel structure. This positioning suggests diminished upside momentum in the near term.

Downside targets are now in focus: the pair could test the psychological 0.6500 level before potentially reaching the six-month low of 0.6414 (August 21). Resistance overhead sits at the nine-day EMA around 0.6619, with a sustained break above that level needed to reignite bullish conditions toward the three-month high of 0.6685, then 0.6707 (highest since October 2024), and finally the upper channel boundary near 0.6760.

The currency landscape reveals that USD to Australian Dollar strength is likely to persist given the divergence in monetary policy trajectories and relative economic resilience, despite Australia’s inflation concerns.